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FACTS: This instant consolidated petitions seek to annul the decisions of the Regional Trial Court which declared
Article 2, Section 3.1 of Executive Order 156 unconstitutional. Said EO 156 prohibits the importation of used vehicles in
the country inclusive of the Subic Bay Freeport Zone.
On December 12, 2002, President Gloria Macapagal Arroyo issued Executive Order 156 entitled "Providing for a
comprehensive industrial policy and directions for the motor vehicle development program and its implementing
guidelines." The said provision prohibits the importation of all types of used motor vehicles in the country including the
Subic Bay Freeport, or the Freeport Zone, subject to a few exceptions.
Consequently, three separate actions for declaratory relief were filed by Southwing Heavy Industries Inc, Subic
Integrated Macro Ventures Corp, and Motor Vehicle Importers Association of Subic Bay Freeport Inc. praying that
judgment be rendered declaring Article 2, Section3.1 of the EO 156 unconstitutional and illegal.
The RTC rendered a summary judgment declaring that Article 2, Section 3.1 of EO 156 constitutes an unlawful
usurpation of legislative power vested by the Constitution with Congress and that the proviso is contrary to the
mandate of Republic Act 7227(RA 7227) or the Bases Conversion and Development Act of 1992 which allows the free
flow of goods and capital within the Freeport.
The petitioner appealed in the CA but was denied on the ground of lack of any statutory basis for the President to issue
the same. It held that the prohibition on the importation of use motor vehicles is an exercise of police power vested on
the legislature and absent any enabling law, the exercise thereof by the President through an executive issuance is
1. Whether or not the Private Respondents have the legal standing in questionaing the said law?
2. Whether or not Article2, Section 3.1 of EO 156 is a valid exercise of the Presidents quasi-legislative power.
1. YES. Petitioners argue that respondents will not be affected by the importation ban considering that their
certificate of registration and tax exemption do not authorize them to engage in the importation and/or trading
of used cars.
The established rule that the constitutionality of a law or administrative issuance can be challenged by one who will
sustain a direct injury as a result of its enforcementhas been satisfied in the instant case. The broad subject of the
prohibited importation is all types of used motor vehicles. Respondents would definitely suffer a direct injury from
the implementation of EO 156 because their certificate of registration and tax exemption authorize them to trade
and/or import new and used motor vehicles and spare parts, except used cars. Other types of motor vehicles
imported and/or traded by respondents and not falling within the category of used cars would thus be subjected to the
ban to the prejudice of their business. Undoubtedly, respondents have the legal standing to assail the validity of EO
Police power is inherent in a government to enact laws, within constitutional limits, to promote the order, safety,
health, morals, and general welfare of society. It is lodged primarily with the legislature. By virtue of a valid delegation
of legislative power, it may also be exercised by the President and administrative boards, as well as the lawmaking
bodies on all municipal levels, including the barangay. Such delegation confers upon the President quasi-legislative
power which may be defined as the authority delegated by the law-making body to the administrative body to adopt
rules and regulations intended to carry out the provisions of the law and implement legislative policy provided that it
must comply with the following requisites:

Its promulgation must be authorized by the legislature;

It must be promulgated in accordance with the prescribed procedure;
It must be within the scope of the authority given by the legislature; and
It must be reasonable.

The first requisite was actually satisfied since EO 156 has both constitutional and statutory bases.
Anent the second requisite, that the order must be issued or promulgated in accordance with the prescribed
procedure, the presumption is that the said executive issuance duly complied with the procedures and limitations
imposed by law since the respondents never questioned the procedure that paved way for the issuance of EO 156 but
instead, what they challenged was the absence of substantive due process in the issuance of the EO.
In the third requisite, the Court held that the importation ban runs afoul with the third requisite as administrative
issuances must not be ultra vires or beyond the limits of the authority conferred. In the instant case, the subject
matter of the laws authorizing the President to regulate or forbid importation of used motor vehicles, is the domestic
industry. EO 156, however, exceeded the scope of its application by extending the prohibition on the importation of
used cars to the Freeport, which RA 7227, considers to some extent, a foreign territory. The domestic industry which
the EO seeks to protect is actually the "customs territory" which is defined under the Rules and Regulations
Implementing RA 7227 which states: "the portion of the Philippines outside the Subic Bay Freeport where the Tariff and
Customs Code of the Philippines and other national tariff and customs laws are in force and effect."
Regarding the fourth requisite, the Court finds that the issuance of EO is unreasonable. Since the nature of EO 156 is to
protect the domestic industry from the deterioration of the local motor manufacturing firms, the Court however, finds
no logic in all the encompassing application of the assailed provision to the Freeport Zone which is outside the customs
territory of the Philippines. As long as the used motor vehicles do not enter the customs territory, the injury or harm
sought to be prevented or remedied will not arise.
The Court finds that Article 2, Section 3.1 of EO 156 is VOID insofar as it is made applicable within the secured fencedin former Subic Naval Base area but is declared VALID insofar as it applies to the customs territory or the Philippine

territory outside the presently secured fenced-in former Subic Naval Base area as stated in Section 1.1 of EO 97-A (an
EO executed by Pres. Fidel V. Ramos in 1993 providing the Tax and Duty Free Privilege within the Subic Freeport Zone).
Hence, used motor vehicles that come into the Philippine territory via the secured fenced-in former Subic Naval Base
area may be stored, used or traded therein, or exported out of the Philippine territory, but they cannot be imported
into the Philippine territory outside of the secured fenced-in former Subic Naval Base area.
Petitions are PARTIALLY GRANTED provided that said provision is declared VALID insofar as it applies to the Philippine
territory outside the presently fenced-in former Subic Naval Base area and VOID with respect to its application to the
secured fenced-in former Subic Naval Base area.
John Hay Peoples Alternative Coalition, et al. vs Lim
FACTS: Herein petitioners assail the validity of Presidential Decree No. 420, Series of 1994, CREATING AND
R.A. 7227 provides for the conversion into alternative productive uses of former military bases in the Philippines, such
as Clark and Subic military reservations and their extensions including John Hay Station (Camp John Hay). RA 7227
created BCDA to carry out the objectives of the law, and the Subic Special Economic (and Free Port) Zone (Subic SEZ),
the metes and bounds of which were to be delineated in a Presidential Proclamation.
Subic SEZ was granted by R.A. 7227 incentives ranging from tax and duty-free importations, exemption of businesses
therein from local and national taxes, to other hallmarks of a liberalized financial and business climate. R.A. No. 7227
expressly gave authority to the President to create, through executive proclamation, subject to the concurrence of the
local government units directly affected, other SEZs in areas such as Camp John Hay.
BCDA entered into a Joint Venture Agreement with private respondents Tuntex and Asiaworld for the development of
Poro Poin in La Union and Camp John Hay as premier tourist destinations and recreation centers. The Baguio City
government passed several resolutions regarding the actions taken by BCDA. Among these involve the exclusion of
barangays located within the camp from BCDAs development programs, a development program that affords
protection to the environment, family-oriented tourist destinations, priority for Baguio residents in employment
opportunities, and liability for local taxes of businesses to be established within the camp. The Sangguniang
Panlungsod of Baguio finally passed a resolution supporting P.D. 420 issued by President Ramos, declaring a portion of
the camp as a SEZ.
P.D. 420 also declared among others that Camp John Hay SEZ is likewise entitled to all applicable incentives of SEZ
under Section 12 of RA 7227 such as the tax exemptions aforementioned. Herein petitioners challenged among others
this provision of PD 420 on tax exemption for being invalid as it is an unconstitutional exercise by the president of a
power granted only to the legislature, and that it violates the rule that taxes should be uniform and equitable. Hence,
this application to the Supreme Court for temporary restraining order and/or writ of preliminary injunction against
respondents for implementation of PD 420.
ISSUES: Whether or not PD 420 is constitutional by providing for national and local tax exemption within and granting
other economic incentives to John Hay SEZ.
RULING: NO. The Court observed that nowhere in RA 7227 is there a grant of tax exemption to SEZs yet to be
established in base areas. The tax exemption provision of Section 12 of RA 7227 only applies exclusively to Subic SEZ,
as confirmed by the deliberations of the Senate during the reading of the bill of RA 7227 with respect to investment
policies that would govern Subic SEZ.
It is clear that under said Section 12, it is only the Subic SEZ which was granted by Congress with tax
exemption, investment incentives and the like. There is no express extension of the aforesaid benefits to other SEZs
still to be created at the time via presidential proclamation.
While the grant of economic incentives may be essential to the creation and success of SEZs, free trade zones and the
like, the grant thereof to John Hay SEZ cannot be sustained. The incentives under R.A. 7227 are exclusive only to the
Subic SEZ, hence, the extension of the same to the John Hay SEZ finds no support therein. Neither does the same
grant of privileges to the John Hay SEZ find support in the other laws specified under Section 3 of Proclamation No.
Petitioners are correct in concluding that the grant of tax exemption to John Hay SEZ contravenes Article VI, Section 28
(4) of the Constitution which provides that No law granting any tax exemption shall be passed without the
concurrence of a majority of all the members of Congress. It is the legislature, unless limited by a provision of the
state constitution, that has full power to exempt any person or corporation or class of property from taxation, its power
to exempt being as broad as its power to tax. Other than Congress, the Constitution may itself provide for specific tax
exemptions, or local governments may pass ordinances on exemption only from local taxes. The challenged grant of
tax exemption would circumvent the Constitutions imposition that a law granting any tax exemption must have the
concurrence of a majority of all the members of Congress.
The claimed statutory exemption of the John Hay SEZ from taxation should be manifest and unmistakable from the
language of the law on which it is based; it must be expressly granted in a statute stated in a language too clear to be
mistaken. Tax exemption cannot be implied as it must be categorically and unmistakably expressed. If it were the
intent of the legislature to grant to the John Hay SEZ the same tax exemption and incentives given to the Subic SEZ, it
would have so expressly provided in the R.A. No. 7227.
In view of the foregoing, the second sentence of Section 3 of PD 420 is declared NULL AND VOID and of no legal force
and effect. The remaining provisions thereof remains valid and effective.
OTHER THINGS to note in the case (baka maitanong ni sir):
1. When questions of constitutional significance are raised, the court can exercise its power of judicial review only if
the following requisites are present: (1) the existence of an actual and appropriate case; (2) a personal and substantial
interest of the party raising the constitutional question; (3) the exercise of judicial review is pleaded at the earliest
opportunity; and (4) the constitutional question is the lis mota of the case. These are present in the case, thus, SC has
jurisdiction to try and decide the case, despite the fact that that RA 7227 actually gives it the jurisdiction to enjoin or
restrain implementation of projects for conversion of the base areas. Petitioners also have locus standi to institute this
action as they have real interest over the subject matter.

2. The SC can void an act or policy of the political departments of the government on either of two grounds
infringement of the Constitution or grave abuse of discretion.
3. Where part of a statute is void as contrary to the Constitution, while another part is valid, the valid portion, if
separable from the invalid, may stand and be enforced.


FACTS: Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169 square meters of real estate
Identified as Lot. No. 1095, Malinta Estate, in the Municipality of Polo (now Valenzuela), Province of Bulacan (now Metro
Manila) which is covered by Transfer Certificate of Title No. T-4240 of the Bulacan land registry.
The said co-owners leased to Construction Components International Inc. the same property and providing that during
the existence or after the term of this lease the lessor should he decide to sell the property leased shall first offer the
same to the lessee and the letter has the priority to buy under similar conditions.
The lessee Construction Components International, Inc. assigned its rights and obligations under the contract of lease
in favor of Hydro Pipes Philippines, Inc. with the signed conformity and consent of lessors.
In January, 1976, a deed of exchange was executed between lessors Delfin and Pelagia Pacheco and defendant
Delpher Trades Corporation whereby the former conveyed to the latter the leased property together with another
parcel of land also located in Malinta Estate, Valenzuela, Metro Manila for 2,500 shares of stock of defendant
corporation with a total value of P1,500,000.
On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease
agreement, respondent Hydro Pipes filed an amended complaint for reconveyance of Lot. No. 1095 in its favor under
conditions similar to those whereby Delpher Trades Corporation acquired the property from Pelagia Pacheco and
Delphin Pacheco.
After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff.
The judgment is hereby rendered declaring the valid existence of the plaintiffs preferential right to acquire the subject
property. The lower court's decision was affirmed on appeal by the Intermediate Appellate Court.
The defendants-appellants, now the petitioners, filed a petition for certiorari to review the appellate court's decision.
The court initially denied the petition but upon motion for reconsideration, the court set aside the resolution denying
the petition and gave it due course.
The petitioners allege that:
The denial of the petition will work great injustice to the petitioners, in that:
1. Respondent Hydro Pipes Philippines, Inc, will acquire from petitioners a parcel of industrial land consisting of 27,169
square meters or 2.7 hectares for only P14/sq. meter, or a total of P380,366, although the prevailing value thereof is
approximately P300/sq. meter or P8.1 Million;
2. Private respondent is allowed to exercise its right of first refusal even if there is no "sale" or transfer of actual
ownership interests by petitioners to third parties; and
3. Assuming arguendo that there has been a transfer of actual ownership interests, private respondent will acquire the
land not under "similar conditions" by which it was transferred to petitioner Delpher Trades Corporation.
ISSUE: Whether or not the "Deed of Exchange" of the properties executed by the Pachecos on the one hand and the
Delpher Trades Corporation on the other was meant to be a contract of sale which, in effect, prejudiced the private
respondent's right of first refusal over the leased property included in the "deed of exchange."
HELD: NO. Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco testified that
Delpher Trades Corporation is a family corporation; that the corporation was organized by the children of the two
spouses (spouses Pelagia Pacheco and Benjamin Hernandez and spouses Delfin Pacheco and Pilar Angeles) who owned
in common the parcel of land leased to Hydro Pipes Philippines in order to perpetuate their control over the property
through the corporation and to avoid taxes; that in order to accomplish this end, two pieces of real estate, which had
been leased to Hydro Pipes Philippines, were transferred to the corporation; that the leased property was transferred to
the corporation by virtue of a deed of exchange of property; that in exchange for these properties, Pelagia and Delfin
acquired 2,500 unissued no par value shares of stock which are equivalent to a 55% majority in the corporation
because the other owners only owned 2,000 shares; and that at the time of incorporation, he knew all about the
contract of lease of Lot. No. 1095 to Hydro Pipes Philippines. In the petitioners' motion for reconsideration, they refer to
this scheme as "estate planning."
Under this factual backdrop, the petitioners contend that there was actually no transfer of ownership of the subject
parcel of land since the Pachecos remained in control of the property. The transfer of ownership, if anything, was
merely in form but not in substance. In reality, petitioner corporation is a mere alter ego or conduit of the Pacheco coowners; hence the corporation and the co-owners should be deemed to be the same, there being in substance and in
effect an Identity of interest."
The petitioners maintain that the Pachecos did not sell the property. They argue that there was no sale and that they
exchanged the land for shares of stocks in their own corporation.
On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate entity separate and
distinct from the Pachecos. Thus, it contends that it cannot be said that Delpher Trades Corporation is the Pacheco's
same alter ego or conduit; that petitioner Delfin Pacheco, having treated Delpher Trades Corporation as such a
separate and distinct corporate entity, is not a party who may allege that this separate corporate existence should be
disregarded. It maintains that there was actual transfer of ownership interests over the leased property when the same
was transferred to Delpher Trades Corporation in exchange for the latter's shares of stock.
We rule for the petitioners.

After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock directly from
the corporation or from individual owners thereof. In the case at bar, in exchange for their properties, the Pachecos
acquired 2,500 original unissued no par value shares of stocks of the Delpher Trades Corporation. Consequently, the
Pachecos became stockholders of the corporation by subscription "The essence of the stock subscription is an
agreement to take and pay for original unissued shares of a corporation, formed or to be formed." It is significant that
the Pachecos took no par value shares in exchange for their properties.
A no-par value share does not purport to represent any stated proportionate interest in the capital stock measured by
value, but only an aliquot part of the whole number of such shares of the issuing corporation . The holder of no-par
shares may see from the certificate itself that he is only an aliquot sharer in the assets of the corporation. But this
character of proportionate interest is not hidden beneath a false appearance of a given sum in money, as in the case
of par value shares. The capital stock of a corporation issuing only no-par value shares is not set forth by a stated
amount of money, but instead is expressed to be divided into a stated number of shares, such as, 1,000 shares. This
indicates that a shareholder of 100 such shares is an aliquot sharer in the assets of the corporation, no matter what
value they may have, to the extent of 100/1,000 or 1/10. Thus, by removing the par value of shares, the attention of
persons interested in the financial condition of a corporation is focused upon the value of assets and the amount of its

Moreover, there was no attempt to state the true or current market value of the real estate. Land valued at P300.00 a
square meter was turned over to the family's corporation for only P14.00 a square meter.
It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the
corporation. Their equity capital is 55% as against 45% of the other stockholders, who also belong to the same family
In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest their
properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher
Trades Corporation to take control of their properties and at the same time save on inheritance taxes.
As explained by Eduardo Neria:
xxx xxx xxx
Q Mr. Neria, from the point of view of taxation, is there any benefit to the spouses Hernandez and Pacheco in
connection with their execution of a deed of exchange on the properties for no par value shares of the defendant
A Yes, sir.
Q What do you mean by "point of view"?
A To take advantage for both spouses and corporation in entering in the deed of exchange.
Q (What do you mean by "point of view"?) What are these benefits to the spouses of this deed of exchange?
A Continuous control of the property, tax exemption benefits, and other inherent benefits in a corporation.
Q What are these advantages to the said spouses from the point of view of taxation in entering in the deed of
A Having fulfilled the conditions in the income tax law, providing for tax free exchange of property, they were able to
execute the deed of exchange free from income tax and acquire a corporation.
Q What provision in the income tax law are you referring to?
A I refer to Section 35 of the National Internal Revenue Code under par. C-sub-par. (2) Exceptions regarding the
provision which I quote: "No gain or loss shall also be recognized if a person exchanges his property for stock in a
corporation of which as a result of such exchange said person alone or together with others not exceeding four
persons gains control of said corporation."
Q Did you explain to the spouses this benefit at the time you executed the deed of exchange?
A Yes, sir
Q You also, testified during the last hearing that the decision to have no par value share in the defendant corporation
was for the purpose of flexibility. Can you explain flexibility in connection with the ownership of the property in
A There is flexibility in using no par value shares as the value is determined by the board of directors in increasing
capitalization. The board can fix the value of the shares equivalent to the capital requirements of the corporation.
Q Now also from the point of taxation, is there any flexibility in the holding by the corporation of the property in
A Yes, since a corporation does not die it can continue to hold on to the property indefinitely for a period of at least 50
years. On the other hand, if the property is held by the spouse the property will be tied up in succession proceedings
and the consequential payments of estate and inheritance taxes when an owner dies.
Q Now what advantage is this continuity in relation to ownership by a particular person of certain properties in respect
to taxation?
A The property is not subjected to taxes on succession as the corporation does not die.
Q So the benefit you are talking about are inheritance taxes?
A Yes, sir.
The records do not point to anything wrong or objectionable about this "estate planning" scheme resorted to by the
Pachecos. "The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether
avoid them, by means which the law permits, cannot be doubted."
The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a
contract of sale. There was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco
family merely changed their ownership from one form to another. The ownership remained in the same hands. Hence,
the private respondent has no basis for its claim of a light of first refusal under the lease contract.
WHEREFORE, the instant petition is hereby GRANTED.
Facts: In the years prior to 1984, private respondent issued a special kind of life insurance policy known as the "Junior
Estate Builder Policy," the distinguishing feature of which is a clause providing for an automatic increase in the amount
of life insurance coverage upon attainment of a certain age by the insured without the need of issuing a new policy.
Documentary stamp taxes due on the policy were paid by petitioner only on the initial sum assured. In 1984, private
respondent also issued 50,000 shares of stock dividends with a par value of P100 per share or a total par value of

P5,000,000. The actual value of said shares, represented by its book value, was P19,307,500. Documentary stamp
taxes were paid based only on the par value of P5,000,000 and not on the book value. Subsequently, petitioner issued
deficiency documentary stamps tax assessment for the year 1984 in the amounts of (a) P464,898.75, corresponding to
the amount of automatic increase of the sum assured on the policy issued by respondent, and (b) P78,991.25
corresponding to the book value in excess of the par value of the stock dividends. Private respondent questioned the
deficiency assessments and sought their cancellation in a petition filed in the Court of Tax Appeals which found no
valid basis for the deficiency tax assessment on the stock dividends, as well as on the insurance policy. Petitioner
appealed the CTAs decision to the Court of Appeals which affirmed the CTAs decision insofar as it nullified the
deficiency assessment on the insurance policy, but reversed the same with regard to the deficiency assessment on the
stock dividends. A motion for reconsideration of the decision having been denied, both the Commissioner of Internal
Revenue and private respondent appealed to this Court.
Issue: WON the "automatic increase clause" is separate and distinct from the main agreement and involves another
transaction, hence, a deficiency assessment based on the additional insurance not covered in the main policy is in

Held: Yes. It is clear from Section 173 that the payment of documentary stamp taxes is done at the time the act is
done or transaction had and the tax base for the computation of documentary stamp taxes on life insurance policies
under Section 183 is the amount fixed in policy, unless the interest of a person insured is susceptible of exact
pecuniary measurement. Logically, we believe that the amount fixed in the policy is the figure written on its face and
whatever increases will take effect in the future by reason of the "automatic increase clause" embodied in the policy
without the need of another contract. In the instant case, the additional insurance that took effect in 1984 was an
obligation subject to a suspensive obligation, but still a part of the insurance sold to which private respondent was
liable for the payment of the documentary stamp tax. Finally, it should be emphasized that while tax avoidance
schemes and arrangements are not prohibited, tax laws cannot be circumvented in order to evade the payment of just
taxes. In the case at bar, to claim that the increase in the amount insured (by virtue of the automatic increase clause
incorporated into the policy at the time of issuance) should not be included in the computation of the documentary
stamp taxes due on the policy would be a clear evasion of the law requiring that the tax be computed on the basis of
the amount insured by the policy.

Co-administrators Lorna Kapunan and Mario Luza Bautista
FACTS: CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and outstanding capital stock,
to sell the Cibeles Building and the two parcels of land on which the building stands for an amount of not less than P90
million. Toda purportedly sold the property for P100 million to Rafael A. Altonaga, who, in turn, sold the same property
on the same day to Royal Match Inc. (RMI) for P200 million. These two transactions were evidenced by Deeds of
Absolute Sale notarized on the same day by the same notary public. For the sale of the property to RMI, Altonaga paid
capital gains tax in the amount of P10 million.
CIC filed its corporate annual income tax return for the year 1989, declaring, among other things, its gain from the sale
of real property in the amount of P75,728.021. After crediting withholding taxes ofP254,497.00, it paid P26,341,207 for
its net taxable income of P75,987,725. Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 million,
as evidenced by a Deed of Sale of Shares of Stocks. Three and a half years later, Toda died. Subsequently, Bureau of
Internal Revenue (BIR) sent an assessment notice and demand letter to the CIC for deficiency income tax for the year
1989. The new CIC asked for a reconsideration, asserting that the assessment should be directed against the old CIC,
and not against the new CIC, which is owned by an entirely different set of stockholders; moreover, Toda had
undertaken to hold the buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal years 1987-1989.
The estate of Toda then received a Notice of Assessment for the deficiency of income tax in the amount of
P79,099,999.22. The Estate thereafter filed a letter of protest.
The Commissioner dismissed the protest. The Estate filed a petition for review with the CTA. CTA held that the
Commissioner failed to prove that CIC committed fraud to deprive the government of the taxes due it. The CTA also
denied the motion for reconsideration. The Court of Appeals affirmed the decision of the CTA.
1. Is this a case of tax evasion or tax avoidance?
2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and
3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if any?
HELD: 1. Tax evasion. Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping
from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used
by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those
lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.
Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that
known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an
accompanying state of mind which is described as being "evil," in "bad faith," "willfull," or "deliberate and not
accidental"; and (3) a course of action or failure of action which is unlawful. 24
All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior to the
purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC received P40 million from RMI, and

not from Altonaga. That P40 million was debited by RMI and reflected in its trial balance as "other inv. Cibeles Bldg."
Also, as of 31 July 1989, another P40 million was debited and reflected in RMIs trial balance as "other inv. Cibeles
Bldg." This would show that the real buyer of the properties was RMI, and not the intermediary Altonaga.

Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner cannot be faulted
for wanting to reduce the tax from 35% to 5%. The scheme resorted to by CIC in making it appear that there were
two sales of the subject properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a
legitimate tax planning. Such scheme is tainted with fraud. Fraud in its general sense, "is deemed to comprise
anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal or equitable
duty, trust or confidence justly reposed, resulting in the damage to another, or by which an undue and unconscionable
advantage is taken of another."
Hence, the sale to Altonaga should be disregarded for income tax purposes. The two sale transactions should be
treated as a single direct sale by CIC to RMI. Accordingly, the tax liability of CIC is governed by then Section 24 of the
NIRC of 1986, as amended (now 27 (A) of the Tax Reform Act of 1997). CIC is therefore liable to pay a 35% corporate
tax for its taxable net income in 1989. The 5% individual capital gains tax provided for in Section 34 (h) of the NIRC of
198635 (now 6% under Section 24 (D) (1) of the Tax Reform Act of 1997) is inapplicable. Hence, the assessment for the
deficiency income tax issued by the BIR must be upheld.
2. No. (Legal basis: Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997).
Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file a
return, the period within which to assess tax is ten years from discovery of the fraud, falsification or omission, as the
case may be. The prescriptive period to assess the correct taxes in case of false returns is ten years from the discovery
of the falsity. The false return was filed on 15 April 1990, and the falsity thereof was claimed to have been discovered
only on 8 March 1991.The assessment for the 1989 deficiency income tax of CIC was issued on 9 January 1995.
Clearly, the issuance of the correct assessment for deficiency income tax was well within the prescriptive period.
3. Yes. A corporation has a juridical personality distinct and separate from the persons owning or composing it. Thus,
the owners or stockholders of a corporation may not generally be made to answer for the liabilities of a corporation
and vice versa. There are, however, certain instances in which personal liability may arise. It has been held in a
number of cases that personal liability of a corporate director, trustee, or officer along, albeit not necessarily, with the
corporation may validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in directing
its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders, or other persons;
2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file
with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate action. 38
When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from any all income tax liabilities of
Cibeles for the fiscal years 1987, 1988, and 1989," he thereby voluntarily held himself personally liable therefor.
Respondent estate cannot, therefore, deny liability for CICs deficiency income tax for the year 1989 by invoking the
separate corporate personality of CIC, since its obligation arose from Todas contractual undertaking, as contained in
the Deed of Sale of Shares of Stock.
CITY OF ILOILO, Mr. Romeo V. Manikan (Treasurer of Iloilo City) vs. SMART COMMUNICATIONS, INC.
Doctrine: A tax exemption cannot arise from vague inference tax exemptions must be clear an unequivocal; A
taxpayer claiming a tax exemption must point to a specific provision of law conferring on the taxpayer, in clear and
plain terms, exemption from a common burden.
Facts: SMART received a letter of assessment dated February 2, 2002 from petitioner requiring it to pay deficiency
local franchise and business taxes in the amount of P764,545.29, plus interests and surcharges, which it incurred for
the years 1997 to 2001. SMART protested the assessment claiming exemption from local franchise and business taxes
based on Section 9 of its legislative franchise under Republic Act No. 7294. Under SMARTs franchise, it was required to
pay a franchise tax equivalent to 3% of all gross receipts, which amount shall be in lieu of all taxes. SMART contends
that the in lieu of all taxes clause covers local franchise and business taxes.
SMART similarly invoked R.A. 7295 or the Public Telecommunications Policy Act (Public Telecoms Act) whose
Section 23 declares that any existing privilege, incentive, advantage or exemption granted under existing franchises
shall ipso facto become part of previously granted-telecommunications franchise. SMART contends that by virtue of
Section 23, tax exemptions granted by the legislature to other holders of telecommunications franchise may be
extended to and availed of by SMART.
Petitioner denied SMARTs protest citing the failure of SMART to comply with Section 252 or R.A. 7160 or the
Local Government Code (LGC) before filing the protest against the assessment. Section 252 of the LGC requires
payment of the tax before any protest against the tax assessment can be made.
SMART instituted a case against petitioner before the RTC of Iloilo City. The trial court ruled in favor of SMART
and declared the telecommunications firm exempt from the payment of local franchise and business taxes; it agreed
with SMARTs claim of exemption under Section 9 of its franchise and Section 23 of the Public Telecoms Act.
Petitioner files this petition for review on certiorari.
Issue: Whether or not SMART is exempt from the payment of local franchise and business taxes.

Ruling: NO.
SMART relies on two provisions of law to support its claim for tax exemption: Section 9 of SMARTs franchise
and Section 23 of the Public Telecoms Act.

Section 9. Tax provisions. The grantee, its successors or assigns shall be liable to pay the same taxes on their real
estate buildings and personal property, exclusive of this franchise, as other persons or corporations which are now or
hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns shall pay a
franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under the
said percentage shall be in lieu of all taxes on this franchise or earnings thereof; xxxxxxxxxxx
Section 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax exemptions or
incentives granted to, or presently enjoyed by all persons, whether natural or juridical, xxxxxxx, are
hereby withdrawn upon the effectivity of this Code.
By virtue of Section 193 of the LGC, all tax exemption privileges then enjoyed by all persons, save those
expressly mentioned, have been withdrawn effective January 1, 1992 the date of effectivity of the LGC. However, the
withdrawal of exemptions pertains only to those already existing when the LGC was enacted. The intention of the
legislature was to remove all tax exemptions or incentives granted prior to the LGC. As SMARTs franchise was made
effective on March 27, 1992 after the effectivity of the LGC Section 193 will therefore not apply in this case
SMART additionally invokes the equality clause under Section 23 of the Public Telecoms Act:
Section 23. Equality of Treatment in the Telecommunications Industry. Any advantage, favor, privilege,
exemption, or immunity granted under existing franchises, or may hereafter be granted, shall ipso facto
become part of previously granted telecommunications franchise and shall be accorded immediately and
unconditionally to the grantees of such franchises: XXXX
The term exemption in Section 23 of the Public Telecoms Act does not mean tax exemption; rather, it refers to
exemption from certain regulatory or reporting requirements imposed by government agencies such as the National
Telecommunications Commission. The thrust of the Public Telecoms Act is to promote the gradual deregulation of
entry, pricing and operations of all public telecommunications entities, and thus to level the playing field in the
telecommunications industry.
The Court finds SMARTs claim for exemption to be unfounded. He who claims an exemption from his share of the
common burden of taxation must justify his claim by showing that the Legislature intended to exempt him by words
too plain to be beyond doubt or mistake. The burden therefore is on SMART to prove that, based on its franchise and
the Public Telecoms Act, it is entitled to exemption from the local franchise and business taxes being collected by the
Petition is granted.

FACTS: The National Power Corporation (NAPOCOR) claims in this case that the machineries and equipment used in a
project covered by a BOT agreement, to which it is a party, should be accorded the tax-exempt status it enjoys. The
Local Board of Assessment Appeals of the Province of La Union (LBAA), the Central Board of Assessment Appeals
(CBAA) and the Court of Tax Appeals (CTA) were one in rejecting NAPOCORs claim.
Hence, the present petition for review on certiorari filed under Rule 45 of the Rules of Court by NAPOCOR challenges
this uniform ruling and seeks the reversal of the CTAs Decision.
In 1993, First Private Power Corporation (FPPC) entered into a BOT agreement with NAPOCOR for the construction of
the 215 Megawatt Bauang Diesel Power Plant in Payocpoc, Bauang, La Union. The BOT Agreement provided, via an
Accession Undertaking, for the creation of the Bauang Private Power Corporation (BPPC) that will own, manage and
operate the power plant/station, and assume and perform FPPCs obligations under the BOT agreement. For a fee,
BPPC will convert NAPOCORs supplied diesel fuel into electricity and deliver the product to NAPOCOR.
The pertinent provisions of the BOT agreement, as they relate to the submitted issues in the present case, read:
2.08 From the date hereof until the Transfer Date, CONTRACTOR shall, directly or
indirectly, own the Power Station and all the fixtures, fittings, machinery, and
equipment on the Site or used in connection with the Power Station which have been
supplied by it or at its cost and it shall operate and manage the Power Station for
the purpose of converting fuel of NAPOCOR into electricity.
2.09 Until the Transfer Date, NAPOCOR shall, at its own cost, supply and deliver all
Fuel for the Power Station and shall take all electricity generated by the Power
Station at the request of NAPOCOR which shall pay to CONTRACTOR fees as provided
in Clause 11.
The OIC of the Municipal Assessors Office of Bauang, La Union initially issued Declaration of Real Property Nos. 25016
and 25022 to 25029 declaring BPPCs machineries and equipment as tax-exempt. On the initiative of the Bauang Vice
Mayor, the municipality questioned before the Regional Director of the Bureau of Local Government Finance ( BLGF) the
declared tax exemption; later, the issue was elevated to the Deputy Executive Director and Officer-in-Charge of the
BLGF, Department of Finance, who ruled that BPPCs machineries and equipments are subject to real property tax and
directed the Assessors Office to take appropriate action.

The Provincial/Municipal Assessors thereupon issued Revised Tax Declaration Nos. 30026 to 30033 and 30337, and
cancelled the earlier issued Declarations of Real Property. The Municipal Assessor of Bauang then issued a Notice of
Assessment and Tax Bill to BPPC assessing/taxing the machineries and equipments in the total sum of
P288,582,848.00 for the 1995-1998 period, sans interest of two percent (2%) on the unpaid amounts. BPPCs VicePresident and Plant Manager received the Notice of Assessment and Tax Bill on August 1998.
In October 1998, NAPOCOR filed a petition (styled In Re Petition to Declare Exempt the Revised and Retroactive to
1995 Tax Declaration Nos. 30026 to 30033 and 30037) with the LBAA. The petition asked that, retroactive to 1995,
the machineries covered by the tax declarations be exempt from real property tax under Section 234(c) of Republic Act
No. 7160 (the Local Government Code or LGC); and, that these properties be dropped from the assessment roll
pursuant to Section 206 of the LGC. Section 234(c) of the LGC provides:
Section 234. Exemptions from Real Property Tax. The following are exempted from the
payment of real property tax:
(c) All machineries and equipment that are actually, directly and exclusively used by local
water districts and government-owned or controlled corporations engaged in the supply and
distribution of water and/or generation and transmission of electric power.

The LBAA denied NAPOCORs petition for exemption. NAPOCOR appealed the LBAA ruling to the CBAA. BPPC moved to
intervene on the ground that it has a direct interest in the outcome of the litigation. CBAA subsequently dismissed the
appeal based on its finding that the BPPC, and not NAPOCOR, is the actual, direct and exclusive user of the equipment
and machineries; thus, the exemption under Section 234(c) does not apply. NAPOCOR then filed with the CTA a petition
for review. BPPC filed its own petition for review of the CBAA decision with the CTA. The two petitions were
subsequently consolidated. The CTA rendered on February 2006 a decision dismissing the consolidated petitions.
Hence, this petition for reviews by BPPC and NAPOCOR before the SC.
Under the terms of the BOT Agreement, can the GOCC be deemed the actual, direct, and exclusive user of machineries
and equipment for tax exemption purposes? If not, can it pass on its tax-exempt status to its BOT partner, a private
corporation, through the BOT agreement?
Otherwise put, whether NAPOCOR was able to convincingly show the factual basis for its claimed tax exemption?
NO, it failed to convincingly show the factual basis for its claimed tax exemption. The Court found the petition devoid
of merit. NAPOCOR failed to sufficiently show that the CTA committed any reversible error in its ruling. NAPOCORs
basis for its claimed exemption Section 234(c) of the LGC is clear and not at all ambiguous in its terms. Exempt
from real property taxation are: (a) all machineries and equipment; (b) [that are] actually, directly, and exclusively
used by; (c) [local water districts and] government-owned or controlled corporations engaged in the [supply and
distribution of water and/or] generation and transmission of electric power.
The Court notes, in the first place, that the present case is not the first occasion where NAPOCOR claimed real property
tax exemption for a contract partner under Sec. 234 (c) of the LGC. In FELS Energy, Inc. v. The Province of Batangas,
the Province of Batangas assessed real property taxes against FELS Energy, Inc. the owner of a barge used in
generating electricity under an agreement with NAPOCOR. Their agreement provided that NAPOCOR shall pay all of
FELS real estate taxes and assessments. We concluded in that case that we could not recognize the tax exemption
claimed, since NAPOCOR was not the actual, direct and exclusive user of the barge as required by Sec. 234 (c).
The Court also recognized this strictissimi juris standard in NAPOCOR v. City of Cabanatuan. Under this standard,
the claimant must show beyond doubt, with clear and convincing evidence, the factual basis for the claim. Thus, the
real issue in a tax exemption case such as the present case is whether NAPOCOR was able to convincingly show the
factual basis for its claimed exception.
The records show that NAPOCOR, no less, admits BPPCs ownership of the machineries and equipment in the power
plant. Likewise, the provisions of the BOT agreement cited above clearly show BPPCs ownership. Thus, ownership is
not a disputed issue.
Rather than ownership, NAPOCORs use of the machineries and equipment is the critical issue, since its claim under
Sec. 234(c) of the LGC is premised on actual, direct and exclusive use. To support this claim, NAPOCOR characterizes
the BOT Agreement as a mere financing agreement where BPPC is the financier, while it (NAPOCOR) is the actual user
of the properties.
In a BOT agreement, it is the project proponent who constructs the project at its own cost and subsequently operates
and manages it. The proponent secures the return on its investments from those using the projects facilities through
appropriate tolls, fees, rentals, and charges not exceeding those proposed in its bid or as negotiated. At the end of the
fixed term agreed upon, the project proponent transfers the ownership of the facility to the government agency.
BPPC has complete ownership both legal and beneficial of the project, including the machineries and equipment
used, subject only to the transfer of these properties without cost to NAPOCOR after the lapse of the period agreed
upon. Notably, BPPC as owner-user is responsible for any defect in the machineries and equipment.
The arrangement, however, goes beyond the simple provision of funds, since the private sector proponent not only
constructs and buys the necessary assets to put up the project, but operates and manages it as well during an agreed
period that would allow it to recover its basic costs and earn profits. In other words, the private sector proponent goes
into business for itself, assuming risks and incurring costs for its account. If it receives support from the government
at all during the agreed period, these are pre-agreed items of assistance geared to ensure that the BOT agreements
objectives both for the project proponent and for the government are achieved. In this sense, a BOT arrangement
is sui generis and is different from the usual financing arrangements where funds are advanced to a borrower who

uses the funds to establish a project that it owns, subject only to a collateral security arrangement to guard against
the nonpayment of the loan. It is different, too, from an arrangement where a government agency borrows funds to
put a project from a private sector-lender who is thereafter commissioned to run the project for the government
agency. In the latter case, the government agency is the owner of the project from the beginning, and the lenderoperator is merely its agent in running the project.

BPPCs ownership and use of the machineries and equipment are actual, direct, and immediate, while NAPOCORs is
contingent and, at this stage of the BOT Agreement, not sufficient to support its claim for tax exemption. Thus, the
CTA committed no reversible error in denying NAPOCORs claim for tax exemption.